The Calculated Risk blog has shared an updated graph of inflation-adjusted housing prices through 2011, based on Prof. Shiller’s data.
Mr. McBride also digs a little deeper and argues that because Shiller changed up the data series he was using in 1987, the true slope of the line should be a little more slightly positive. Using the original data series would result in an overall slope of housing prices increase slightly faster than inflation (1.5% per year) vs. the Shiller line (0.5% per year). His conclusion:
In many areas – if the population is increasing – house prices increase slightly faster than inflation over time, so there is an upward slope for real prices.
This reminded me of this chart via Sober Look that compared the US age distribution in 2000 and 2010 (US Census). The Boomers are getting old, and there is a little gap before the Echo Boomers come in. How will this affect housing prices in the future?
To me, the main takeaway is still that housing prices over the long run don’t rise much faster than inflation. This is not unexpected, as the cost of housing is by definition a big component of inflation. Of course, housing also provides dividends in the form of rent. So if you actually owned a house instead of most people “owning” a house with a big fat mortgage, your overall return on investment would be much better. I can’t wait to really own my house so I can earn that imaginary (imputed) rent.
In reality, what many people seem to do nowadays is hold on and rent out their properties for less than their mortgage payment and hope for price appreciation. This might work I suppose, and one could argue from the graph that prices overall are now close to historical averages. There are now some places where you can buy a house that rents for more than the mortgage payment, but unfortunately not anywhere near me (unless we’re talking huge down payment). As for me, I suppose I’ll just stick with owning low-maintenance REITs and getting my “rental income” that way.
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For the last couple of years and maybe the next few as well wages have not increased much. Most of us don’t have a choice in paying higher food and gas prices but we don’t have to move. I think this is the biggest reason why home prices are remaining stagnant. When wage increases start to keep up with inflation home prices will rise again.
What I’ve always read is that housing prices tend to track wage inflation over time. This is consistent with your post in that wage inflation has typically been about one percent over price inflation in the U.S. Intuitively, this makes sense to me. Ultimately people have to be able to afford a place to live, so in the very long run, I suppose house prices need to have some relationship with wages.
If housing does not exactly track inflation *over the long run*, even running 0.5% above inflation, then why wouldn’t it *eventually* consume the entire budgets of families?
Does the conventional wisdom that housing, over the long run, grows faster than inflation by 1% make any sense at all, or is it more BS fed by the housing industry?
Houses have always been whatever the market will be bear. Different parts of the country will fluctuate more than others. Here in Texas, our housing market has begun to come back. We still have land to build on and that helps. Once wages start in increase, I think we’ll see more people buying again.
Can people not rent their houses out for more than their mortgage payment? Seems to be fairly common where I live. If not for a profit.
I live in the bay area as well, and there are plenty of properties that can be rented out for more than the mortgage payment… sometimes almost twice as high. Most of these properties are in the east bay and are often not in the best neighborhoods, but the cash flow is there.
When you consider what people have paid into their pensions over the past 20 years and their returns and compare that to long term investment in a property portfolio, including as you mentioned the rental income you receive along the way, property seems the clear winner as a hedge against inflation.
The reason why renting out a house for less than the mortgage can work out very well for you is two things – tax deductions, and leverage. If you buy a house for $100,000, put 20% down, and rent it for less than the mortgage, but enough to break even after tax deductions, your return is 5 times the price appreciation.
I agree with the author, REITs offer a low-maintenance passive way to invest in the real estate. House can prove to be a good deal if you are able to buy one at foreclosure at deep discount, have willingness/skills to fix it, have willingness to rent it out, and maintain it. There are a lot of people who possess these skills. Others who don’t, end up spending a lot of their time or money in overheads using property management company that can eat into your lunch/rent.
Hmmm. Renting for less than the mortgage can work if your combined household income is less than 125k. Over that and you end up with a bunch of passive activity loss carryover. Comes in handy when you want to sell but it’s otherwise kind of useless on a year to year basis.
That said, if my wife were willing to accept another rental house, I’d buy another home in my town of San Diego as I’m seeing houses in some areas go for under 200k. These same homes were selling for over 400k in 2006-2007 and can currently be rented for over $1600. Doing the math on a 50k investment (40k down, 10 closing, repairs), these places will net the owner over 5k profit a year and the asset will improve in value yearly (just with the mortgage going down). If the market doesn’t recover in ten years you’ll see two things by then:
1. You’ll have a good 33k of equity built up
2. Rents will have increase at least 25-30% while the taxes will remain near flat
Another big plus of socal: repair costs will remain astoundingly low. I’ve learned my lesson the hard way. While a house in say Texas is quite cheap to buy, the weather takes its toll. Yearly. In San Diego there is no weather, the taxes are cheap and insurance crazy low. I pay 3 times more for property insurance on Dallas homes that are worth 30% of the value of my San Diego rentals. My property taxes in CA have slowly inched up but still remain far lower than Texas.
If you can afford a house in CA prop 13 kicks major butt for rental properties. And assuming the market picks up again in 10-15 years, one could be sitting on a few hundred k in value. All while collecting cash on the initial deposit.